Ellington Financial Inc. (EFC) Q2 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Financial Second Quarter 2017 Earnings Conference Call. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the floor over to Maria Cozine, Vice President of Investor Relations. You may begin.

Thanks, Victoria, and good morning. Before we start, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under Item 1A of our annual report on Form 10-K filed on March 16, 2017, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from it beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I have on the call with me today Larry Penn, Chief Executive Officer of Ellington Financial; Mark Tecotzky, our Co-Chief Investment Officer; and Lisa Mumford, our Chief Financial Officer. As described in our earnings press release, our second quarter earnings conference call presentation is available on our website, ellingtonfinancial.com. Management's prepared remarks will attract the presentation. Please turn to Slide 3 to follow along. With that, I will now turn the call over to Larry.

Thanks, Maria, and welcome, everyone, to our second quarter 2017 earnings call. We appreciate your taking the time to listen to our call today. In the second quarter, credit spreads continued to growing tighter and volatility remained historically low. Solid carry from our credit investments drove Ellington Financial's performance, with losses on our credit hedges and credit-relative value strategies partially offsetting that income. Our economic return for the quarter was a positive 85 basis points or 3.4% annualized. And our year-to-date economic return stood at 6.9% annualized through midyear. To give you a sense of how low volatility was on a historical basis, the 10-year treasury traded inside of 29 basis point range for the quarter, which we'd only see once before in the past 4 years. Also, the VIX hit a 23-year low and the MOVE, Merrill Lynch's option Volatility Index gets to a 4-year low. The yield curve continued to flat by 22 basis points, which was double the flattening of the first quarter. Despite the low volatility, we continue to find attractive opportunities to deploy capital and rotate our portfolio. We took advantage of tight non-Agency RMBS spread by selling a number of our U.S. non-Agency position and redeploying those proceeds into attractive U.K. nonconforming RMBS that we believe currently offer superior value to their U.S. counterparts. We also increased our investments in several high-yielding strategy, including our CLO, small-balance commercial mortgage and non-QM portfolios. Amidst the low volatility, we modestly increased the size of our credit portfolio from $640 million to $685 million, a level where we still see ample room to add assets prudently, particularly with some of the term, nonterm market, nonmark-to-market financing options available in the market today. In June, we marked a milestone by participating in Ellington's first self-managed CLO. We contributed a portion of our leverage loan portfolio as collateral to the CLO and retained a portion of the junior tranches. We are excited about the long-term locked-in financing that the CLO provide, with an effective cost of funds that is well below the yield on the underlying collateral pool. We think the retained tranches will achieve a mid- to high teens return on equity. And we were able to free up capital to redeploy. We are pleased with the CLO execution and in many cases, we are now finding securitization financing to be an attractive alternative to rebound. For example, we are getting close to critical mass for our first non-QM securitization, which we hope to complete in the third quarter. By engaging in securitizations, we may have a somewhat higher cost of funds as compared to repo financing, but we eliminate the need to set aside reserve capital from margin calls or repo role risk. And we're able to be more nimble with our capital allocation, given the long-term mocking nature of securitization financing. Although repo still usually represents the cheaper option. We are finding the effective cost of funds has substantially narrowed between the 2. And as a result, we are often finding securitizations to be the superior choice overall. Furthermore, in each sector of the securitization market, the market tends to reward repeatish awards with better and better execution. So we would help to reap the benefits of those additional funding advantages with each success of securitization that we do in each sector. Similar to prior earnings calls, Lisa, will run through our financial results, and Marc will discuss how our markets performed over the quarter, our portfolio performed and what our market outlook is. Finally, I will follow with some additional remarks on the opportunities we're seeing and our plans for the latter half of the year before opening the floor to question. And with that, I'll turn the call over to Lisa.

Thank you, Larry, and good morning, everyone. On our Earnings Attribution table on Slide 18, you can see that in the second quarter, our credit strategy generated growth in terms of $9.4 million or $0.28 per share, and our agency strategy generated growth P&L of $370,000 or $0.01 per share. After expenses and other items, we had net income of $5.1 million or $0.16 per share. Last quarter, you can see that we had net income of $15.3 million or $0.47 per share. The following is a brief overview of the drivers of our credit and agency results. In our credit strategy, you can see that during the quarter, we had a $0.27 per share quarter-over-quarter decline in growth income. The most significant factors that drove this decline were our credit hedges and net results from our credit relative value-trading strategy. Credit hedges cost us around $0.11 a share, and our corporate credit relative values-trading strategy lost around $0.07 per share. Credit spreads on CMBS and high-yield corporates tightened during the quarter. And since we generally use short positions in these instruments in many of our credit strategies, the hedge credit risks, they generated net losses during the period. However, our long assets performed well during the quarter. We net sold U.S. non-Agency RMBS, CMBS and nonperforming and reperforming residential loans at meaningful gains. Our European assets benefited from tightening credit spreads and appreciated in value. While we had continued solid performance in our small-balance commercial mortgage loans, we did not have any significant resolution in the quarter. The timing of resolution tends to make P&L lumpy for this asset class. We increased the size of our long credit holdings by 7% or $45 million to $685 million. The net growth in our credit portfolio was in European RMBS, U.S. CLOs mostly as a byproduct of our participation in the securitization transaction Larry mentioned and non-QM loans. Our credit strategy represents about 71% of EFC's total capital base. Based on our 6 months results, our annualized gross return on allocated capital was about 12%. This growth return includes financing costs, hedging costs, servicing fees and other investment-related expenses related to portfolio assets, but excludes general operating expenses and management fees. A major refocus for us has been around our financing arrangements, wherein addition to as a replacement for repo financing we're entering into and utilizing other arrangements, including term financing facilities and securitization. During the quarter, we increased our credit-related debt-to-equity ratio based on allocated capital from 0.68:1 to 0.86:1. At $0.01 per share, our P&L in the second quarter from our Agency RMBS strategy declined relative to the first quarter. Essentially, net carry on our portfolio was offset by losses on our interest rate hedges, and we had very modest net realized and unrealized gains. Lower longer-term interest rates, low volatility and firm dollar role led to losses on our hedges. Our TBA short positions, which we use as a principal component of our interest rate hedging strategy, generated modest losses as low prepayment activities led to the outperformance of TBAs relative to specified pools. In the second quarter, we had a negative $200,000 catch-up premium amortization adjustment, which caused a decrease in interest income and a positive adjustment in the first quarter of $2.1 million. But those adjustments are entirely offset in net realized and unrealized gains and losses. Excluding the impact of these adjustments, the yield on our agency portfolio decreased very slightly by 3 basis points to 3.1%. And meanwhile, our average cost of repo financing increased 16 basis points to 1.11%. Our agency strategy utilizes about 18% of our total capital. And we ended the quarter with a leverage ratio to allocated capital of about 6.8:1, up from the first quarter when it was 6.1:1. In the first quarter, our general operating expenses were about $4.6 million, representing an annualized expense ratio of 2.83%. We ended the quarter with diluted book value per share of $19.21. And we have positive economic returns of 0.85% for the quarter and 3.38% for the 6 months ended June 30. I will now turn the presentation over to Mark.

Thanks, Lisa. This quarter felt some ways like a continuation of last quarter. Interest rate volatility was low and generally favorable economic data led to a continued tightening in the structure credit spread. So against this backdrop, our bottom line results are a disappointment. While we made good progress in many areas, as Lisa mentioned, credit hedges dampened our results by $0.11. We had a $0.07 loss in our corporate credit relative value strategy. One big positive development was the CLO we did that Larry discussed. This is a great example of EFC using securitization market to manufacture its own high-yielding investment. As credit spreads have tightened, our ability to term finance -- term some of our portfolio of high-yielding assets via securitizations is vastly improved, and it's something we will look to do more of. Additionally, despite broadly tighter spreads in credit market, we were still able to grow our portfolio without sacrificing yields, adding another $45 million in credit assets, as shown on Slide 22. At the same time, parts of the asset pie shifted. As we contributed bank loans to our CLO securitization, the corporate debt pie shrunk and the CLO size grew. European assets grew as we saw spreads there lagging the tightening in the U.S. spread. Our residential NPL portfolio also grew a little. Not only have securitization economics improved, but nonsecuritization financing, especially, term banks facility financing have also improved recently and it has improved in 2 dimensions. Firstly, spreads to LIBOR are lower and equally important the tender of financing terms have increased. In the consumer loan sector, we continued aggregating loans into 3 existing flow arrangements. We closed our term credit facility for our largest consumer loan flow agreement in the first quarter of this year. And we expect in the third quarter to close a similar strategy for our second largest flow agreement. Both facilities featured nonmark-to-market term financing with revolving period followed by the amortization period. When evaluating the most efficient way to finance our book of short duration consumer loan, we determine that pursuing banks ability is a more attractive alternative to securitization due to lower upfront cost and more flexible revolving nature, while offering a similar cost of funds to raided ABX. Our non-QM loans, which we buy exclusively from our origination partner in which we own a significant equity stake, continue to perform extremely well. Our portfolio grew by 31% in the quarter to $126 million. And we have now accumulated nearly enough loans to do a securitization. We currently finance most of the portfolio with repo. And by securitizing the portfolio, we look forward to locking in long-term nonmark-to-market financing and freeing up capital to redeploy. We expected to tighter spreads that we're seeing in the securitized market will lead to a very favorable execution for us when accumulating these assets over some time. The negative this quarter was our corporate credit relative value-chain strategy. We have strong reason to believe that this is the onetime event. This strategy performed very well for us throughout the last year and is solidly profitable life to date. In Q2, there were few aberrational moves in the cash-synthetic base, it's for some name. The strategy once again returned to profitability in July. And we view it as a great source of return, while we continue to ramp up the high-yielding investments that we create via our flow agreement, our securitization and our sourcing capabilities. So eventually, we expect to see the size of the strategy to begin to ramp down as our core portfolio of high-yielding assets starts to reach desired level. On Slide 7, you can see the unleveraged yields we estimate for strategies. For all these strategies, we have efficient financing agreements in place. We can prudently leverage these deals. These deals are high relative to most of it sectors of the securitized credit market because we have been deploying capital into sectors that have significant barriers to entirely. Many of our strategies require a combination of specific expertise, unique flow arrangement or significant infrastructure to handle operational complexity. The benefit has been that we have not seen significant erosion of our yields in these sectors despite a broad-based tightening of credit spread. The challenges that ramp up time has been longer than we had anticipated. A case in point is non-QM. We like our portfolio, but we wish it would ramp faster. Same thing with consumer loan. You're clearly moving in the right direction evidenced by the growth in the portfolio slide on Page 22. While the portfolio grew on an aggregate basis, we did continue our slow exit from non-Agency MBS and have reached our targeted spread and redeployed that capital in sectors that have greater total return potential going forward. It was an interesting development in non-Agency market this quarter when Wells Fargo operating in their capacity as trustee refused to release cash flow on some deals that were called. Our holdings were unaffected and there were no similar activity in July. We had a very solid contribution from our residential NPL/RPL strategy. We sold a portion of our reperforming loan holdings that had achieved our price target and deployed the capital into higher-yielding sectors. These reperforming loans were sold at significant gain relative to our initial purchase price. While our corporate credit hedges are greatly reduced in size compared to last year, we did separate drag this quarter from these positions. In tightening and widening cycle, most liquid industries lead the way. So the drag on earnings we felt this quarter, but EFC will probably realize the benefits of tighter credit spread over time or through tightest securitization spread or future sale prices. We have seen this dynamic over time. We generally don't realize the full benefit of tighter spread until we exit the holding such as the RPL sale we closed this quarter. Going forward, we see a credit landscape for spreads have tightened the most -- for the most commoditized sector such as credit risk transfer bonds and non-Agency MBS. What that means is those sectors hold less future return potential and more potential downside. While there was no near-term catalyst for spread widening, there are certainly potential speed bumps on the horizon. The fed is expected to start their passive balance sheet reduction later this year. The ECT -- the ECB starts talk about tapering. I think EFC is fairly well insulated from these risks. We have transitioned the portfolio into less commoditized high-yielding sectors. And we are very diversified across residential, commercial and consumer risks in both the U.S. and Europe. So spread tightening quarter like this one, we don't participate to the same extent in market gains that occurred in the more commoditized sectors. That also means our portfolio yields have not come down as much either. So our earnings potential going forward is intact. Looking ahead, we remain optimistic about our earnings potential. The securitization we did this month creates high-yielding assets on the balance sheet. They will help drive future earnings. Our low-cost term financing agreements we have put in place help us increase our return on capital. And the credit metrics of our portfolio remain very healthy. Although we would like our pace of acquisitions to be faster, we think it is more important to be selective to support strong performance and preserve book value going forward. With that, I'll turn the call back to Larry.

Thanks, Mark. In the second quarter, we continue to see a steady pipeline of high-yielding loans and securities. Our assets continue to perform well. And our outlook for their future performance is extremely positive. As Mark and Lisa mentioned, we were able to grow our credit portfolio by 7%, which isn't the level of growth we'd ideally like to see. However, that 7% figure really doesn't tell the whole story, since we securitized enough. For example, on our CLO transaction, we contributed leveraged loans and took back CLO tranches. And as you'd expect on a net basis, our overall portfolio decreased having freed up capital for future asset acquisitions. As we continue to securitize portions of our portfolio of yield-bearing asset, the overall size of our credit portfolio has got to experience more of this 2 steps forward, 1 step back phenomena. But ultimately, we'll end up with a much more robust earning stream. We think that it's especially important in this market environment to be disciplined as we add asset. We have built our pipelines and sourcing capabilities for a reason. We believe that they provide us with much better risk-adjusted returns and can be found in the commoditized markets. We don't want to sacrifice quality for speed. We now have so many different strategies that we can draw on. And I believe that it was a bit of an anomaly that our credit portfolio only grew by 7% this past quarter. As I said, it will be 2 steps forward and 1 step back, as we accumulate assets and then do securitizations, but we will get there. I did want to mention one other notable development this past quarter relating to our robust mortgage origination joint venture Longbridge Financial. Longbridge has continued to expand its footprint. And in the second quarter, it obtained a Ginnie Mae securitization license becoming only the 14th active-approved issuer of Ginnie Mae reverse mortgage-backed securities. This is a very difficult license to obtain. And Longbridge's ability to securitize will now be an important driver of its further expansion. We are excited for the opportunities ahead for EFC and Longbridge in a somewhat misunderstood asset class. Our competition is very low, and demographic trends are exceptionally favorable. The long-term plan is to build a large portfolio of reversed mortgage servicing right, which offer high returns than conventional MSRs. Ellington Financial's objective is to build a diverse group of high-yielding asset that can generate a powerful and consisting earnings stream for shareholders. As you can see on Slide 10, our move away from lower-yielding legacy assets is nearly complete, as we continue to sell down legacy non-Agency RMBS and rotate capital to more attractive opportunity. In the coming quarters, we expect a layer on additional high-yielding assets, redeploy capital from asset sales and securitizations into additional loans and securities investments and achieve that desired earning stream. However, that said, please keep in mind that a crucial element of our strategy has always been to greatly reduce the volatility of our book value and the volatility of our earnings through dynamic credit hedging and interest rate hedging. Although our hedges have weighed on returns in recent quarters, in the current environment, the valuations near or above precrisis levels for many asset classes, we believe that our prudent hedging strategy is as important now as ever. And this concludes our prepared remarks. We're now pleased to take your questions. Operator?

[Operator Instructions]. Your first question comes from the line of Steve Delaney with JMP Securities.

A message came through loud and clear here on the call listening to your comments that your future focus at least in the -- if this market environment prevails is going to continue to exit QSubs and focus heavily on whole loans of various types. I'm just curious and not only if it's possible for you to do, but is -- you've mentioned maybe as many as 5 different loan types. Can you sort of order in some way where you think the greatest opportunities, maybe the top 2 opportunities within the whole loan universe that you're currently targeting?

Yes, it's -- Steve. It's really -- it's -- so some of it's hard to predict, right. I think our best performance strategy over years now has been our small-balance commercial mortgage strategy, which is both stressed and bridge loans. And we are certainly hopeful that flow will increase there. And where -- I think it would be great. It's very hard to predict kind of the pace of that. But it's certainly, one of the asset classes that we would like to see grow more. And our strategy where we've had, again, a pretty small deployment of capital is the residential NPL/RPL strategy. And we just want to have all these different strategies so that when something really attractive comes to market, we can add it any one of these sectors. Non-QM, that's more visible right in terms of the pipeline that we have from our partner. And that was a little more predictive in terms of their ramping up their origination volume, but so we can be a little more predictive there. I think if the mark would have crack right, and all bets are off. And as you can see, we're still somewhat defensive on the security side. Credit risk transfer is something that Mark mentioned is the factor that we think is very tight. But if the GSEs change their policies there and start to issue more that paper or something else happens in the overall markets, we think that could be a market that has shown to move very quickly in the past and that could be a great entry point there. So I don't want to sit here and say that we're necessarily a year from now or 6 months from now going to have no QSubs in our portfolio. But you're right that many of the opportunities we're seeing are in these less commoditized loan sectors as opposed to the QSub sectors. On CLOs, though, I have to say right. Those are QSubs. And that's been a profitable strategy for us. I think we said we moved away from legacy. Maybe I'm being a little hypertechnical here, but now the focus for us has been more in some of the post-legacy, but still seasoned sectors like 2012, 2013, which we're seeing good opportunities there and a lot of deleverage deal. So and QSubs in Europe is another good example, right. We added our -- to our U.K. RMBS. And Mark you want to add?

Yes. Steve, I want to add one thing that the fact that the securitization markets are open and execution is tight, that's sort of transformational for liquidity on many types of loans, but non-QM loans because you can securitize them now and there has been consistent deal flow and there's sort of a defined market, that mix that sector are a lot more liquid. And I think the same thing is the bank loans where you connect advertising through a CLO. So that's a big change in the market from 3 years ago, especially, on the non-QM side that loans become a lot more liquid if there is a relatively healthy robust consistent securitization market, so it's down in liquidity...

I think this is an interesting development, I think, for the mortgage REITs broadly. And it seems like we have -- well, I'm going to come back to the agency strategy. Let me just finish with this. It has been ever since we heard of what a hybrid REIT was, I think it was 0.8, 0.9. It was obviously a postcrisis kind of development to take advantage of legacy RMBS. But it seems like over the last year or 2, what Trevor and I scratch our heads about is it seems the legacy trade is so played out, where are we going to create new credit. Redwood was trying to do it in the jumbo space. And you guys have been pioneers in -- through your joint ventures, but it seems to us that, that somehow another if you're going to be a credit mortgage REIT, you are going to need to tap into the -- create your own flow of collateral. It just -- and it seems to me that's where you're going. And it's evolving, I think, you guys are aware of this. We now have a public small-balance commercial mortgage REIT. And we now have a public NPL/RPL. So I think as you grow these strategies, I think investors will -- you'll start running into investors that actually understand that business model because a couple pure play names that are educating the space will involve...

Yes, I think that's a great point. And we absolutely agree that especially in the small-balance commercial areas that's a very small fruitful area. We want to though be able to have diverse portfolios that were ever -- we see the opportunity. We want a foothold, certainly, in each place, but we want to be able to go where we think the best attractive returns are. And one advantage of our not being a REIT is we can also play in the consumer space as well. And so...

Right. Your consumer relationships are sort of on a flow basis, right?

That's right.

And I assume your NPL/RPLs, you're looking at pools, right, that are...

We're not. So we're not. Exactly, that's not something where we're creating our own flow per se. We're operating a little bit below the radar screen in terms of the size of the pools that we're buying. But that's been a -- the nice thing about that market is that it's again a very predictable market by things, which we like to do, of course, at a very low implied loan-to-value ratio in terms of the underlying asset that's securing the loan. So where we feel like that strategy is very steady, doesn't have a lot of downside and now that we've had -- and we haven't really had lines -- really, really good lines in that space for more than a year, I don't think so. That's definitely a possible area for growth given that the type of lines that we have, financing lines we're referring to are now a lot more attractive, not just in terms of rates, but also, in terms than they were several years ago.

And Larry, do you -- on your small-balance commercial, do you have anything like a flow arrangement there? I'm not asking for names by any means. Just is that a business you can do on flow? Or do you have to do sort of many balls there as well?

No, no, no. Not many balls. It's relationship. It's brokers and relationships. So in that sense, we definitely feel like we are in some manner, in control of our own sourcing. On the bridge loan side, we do have specific relationships. We're not exclusive, but we have specific relationships that we take advantage of there. And we also have some common asset servicers that we deal with and not only service the asset to help us resolve them, but also, have -- they are tentacles out into the market and help us source a lot of assets as well.

Your next question comes from the line of Eric Hagen with KBW.

You guys have, historically, been pretty active in trading sovereign credit. And it looks like the core short position in European sovereign bonds is pretty stable in the second quarter. How do you think about that position given both the level of rates in Europe as well as the potential withdrawal of stimulus from the European Central Bank?

Yes. So just to be clear. That position is and always has been a hedge, mostly a currency hedge and to a lesser extent, a credit hedge, but a little of both in the -- just for our European assets. So we've talked about Spanish NPLs in the past for example. We had French assets. So U.K. assets obviously. So we want to hedge our currency risk obviously, and that's like interest rate risk. That's the thing that we would hedge religiously I would say. But in terms of credit risk, we think that these have the additional benefit being short to sovereign, not only of hedging currency, but also having a correlation to be sure with whatever underlying asset we have in that country. So that explains those. So we're not -- it's not sort of a global credit hedge, the way that we might have it in other market. The way you might see be in active things like that. It's a very, very specific hedge against an asset that we have in a particular country.

Your next question comes from the line of Jessica Levi-Ribner with FBR Capital Markets.

Most of have been asked and answered, but a quick one on the NPL/RPL market. If you could talk a little bit about the trends you're seeing there, and how you're thinking about investment going forward? I know the market is pretty well bid and so I'd love to hear your thoughts?

Sure. This is Mark. So the way we think about sourcing is that we have found that the [indiscernible] or packages from the big bank and from HUD are priced much lower expected returns than smaller- or medium-sized packages that we might source from banks. So we focused a lot on sourcing packages from sellers that are smaller and also, sellers that did not have the capability to thoughtfully and aggressively service the loans over time. So I think one nice thing about that strategy is in that strategy we generate returns in part to hard work, not necessarily from market movement. So we have found it. The team we have in place there has done a really great job in creating value in our loan by working with borrowers, by cleaning up loan file, by getting trailing doc. So the combination of sourcing loans from sellers that aren't as competitive and also, sourcing loans from sellers that haven't necessarily got all the resolutions they could get out of a package has what driven our returns. And then when we go to exit, we've seen a very healthy market for reperforming loan from some of the platforms that aggressively look to add assets there. So we've been able to, I think, source yield tiered into average market yield. We've done a good job in getting better resolutions and getting better performance out of the loans from the efforts of the team. And then, when we go to exit, we're finding a fairly liquid market to exit loans when they've hit their targeted return strategy. So we like that sector very much. We're going to keep sort of that approach to it.

And just, I want to add one more thing which is that when those packages are put out for bid as opposed to some of the bigger packages, right, you're going to have -- a lot of times you're going to be able to get exclusive. It's not going to be -- people know they can't. There's a lot of work that comes into bidding one of these packages. So for small package it's not kind of thing where you're going to able to get 20 people to do all the work and getting comped away you can for Fannie Mae package. So we can sort of take advantage of that, pick our spot and get more of an exclusive relationship with seller through a broker usually for those packages that do trade cheaper because they're smaller.

Our next question comes from the line of George Bahamondes with Deutsche Bank.

Just had a question on what you guys are seeing in the third quarter. I understand that there was a bit of headwinds in the second quarter with regard to credit spread tightening and your hedges kind of bringing down your earnings for the quarter. Again, just really trying to wrap my head around what we should expect for the second half of '17 thinking the way that I was modeling this year. Again, I expected thing to turn around and I know that the tightening of credit spread that has an impact given your exposure to that. You've reduce ted exposure quite a bit versus '16, but -- how should we think about the second half of '17 given that some of the strategies you guys are focused on aren't wrapping up quite as quickly as you'd expect them to?

Yes. So thanks for the question. First of all, I do want to say that usually around that business there at month -- which will be Monday, that's normally, we don't preannounce these things. But normally, on Monday would be when we would publish our estimated book value for July. So I'd rather not talk about July, overall, at this point, but you'll see something just probably early next week. In terms of looking forward to the second half of the year, I would like to point out that we did cover our dividend in the first quarter. In the second quarter, if you strip out those effects that leads to quantify $0.11 or so and the credit hedges $0.07 or so on that rallied by trading strategy that we did just disclose was profitable in July. Then, you're pretty close to the dividend, right. So if you add that back to our earnings quarter-to-quarter. So I think we're, as I said, I don't think we're quite there in terms of where we want to be, in terms of having that portfolio of yield-bearing assets, the size, the way we wanted to be sized. We still have extra capital. You can see that in our cash balance. And you can see that in the sizing of some of the strategies like Guerilla value strategy that are still being used while we're ramping up. But yes, so I think for the next quarter or so and if you look on Slide 7 -- thanks Lisa, you can see that we have capital that we view as utterly undeployed of 11%. And that's not an unusual number for us, but I'd like to point out that included in the other capital numbers is risk capital as well. That extra capital we set aside to counter the fact that if we got repos you might have margin calls, repo role risk. A lot of it's related to the repo. So -- which I think is going to also tough also from our call, we're moving away from repo, right. Moving more towards things like term banks financing, for example, in the consumer portfolio and securitization plan, I think, ultimately on some other thing. So yes, so I think that's how I would think of it. What's the expression, trees don't grow to the sky. So I think that the drag from these credit hedges is got to be largely played out. I'm never going to say it's totally played out, but we think that it's still a very prudent hedge to have in place even where spreads are, especially, in so many of these commoditized sectors. So I -- we're not -- in our DNA, we're not going to just toss those out because they have performed well.

Right. Okay. That's helpful. Just -- I do appreciative the comments just given I know the credit hedges were a bit of a headwind in '16. So seeing that again this quarter was a bit of a surprise to me.

Thank you. That concludes today's conference call. Thank you for your participation. You may now disconnect.